Please give me the correct answer:

Jacobs Engineering Group had its target price increased by analysts at KeyCorp from $82.00 to $86.00 in a research note issued to investors on Wednesday, Benzinga Ratings Tables reports. The firm currently has an "overweight" rating on the construction company's stock. KeyCorp's price target indicates a potential upside of 7.69% from the company's current price. Other research analysts have also issued research reports about the company. MKM Partners lifted their price target on Jacobs Engineering Group to $87.00 and gave the stock a "buy" rating in a report on Tuesday, February 26th. ValuEngine upgraded Jacobs Engineering Group from a "hold" rating to a "buy" rating in a report on Monday, February 25th. Cowen set a $82.00 price objective on Jacobs Engineering Group and gave the stock a "buy" rating in a report on Wednesday, February 20th. Citigroup set a $83.00 price objective on Jacobs Engineering Group and gave the stock a "buy" rating in a report on Wednesday, February 20th. Finally, Robert W. Baird set a $83.00 price objective on Jacobs Engineering Group and gave the stock a "buy" rating in a report on Wednesday, February 20th. Two equities research analysts have rated the stock with a hold rating and fifteen have issued a buy rating to the company's stock. Jacobs Engineering Group has a consensus rating of "Buy" and a consensus target price of $84.55.

The case above reports that two of the equities research analysts have rated the stock with a “hold” rating. If the two equities research analysts are right, what results must have found about the value of Jacobs Engineering Group’s common stock?

1. Two equities research analysts found that the current market price of common stock for Jacobs Engineering Group is above the book value of Jacobs Engineering Group’s common stock.

2. Two equities research analysts found that the current market price of common stock for Jacobs Engineering Group is equal to the intrinsic value of Jacobs Engineering Group’s common stock.

3. Two equities research analysts found that the current book of common stock for Jacobs Engineering Group is above the intrinsic value of Jacobs Engineering Group’s common stock.

4. Two equities research analysts found that the intrinsic value of common stock for Jacobs Engineering Group is above to the current common stock price of Jacobs Engineering Group.

5. none of the answers is correct.

Benchmark, the Silicon Valley venture firm and early investor in Uber, has sued former CEO Travis Kalanick.

In a Delaware Chancery Court filing, originally identified by Axios’ Dan Primack, the suit alleges that Kalanick committed fraud, breach of contract and breach of fiduciary duty. Both Kalanick and Benchmark hold Uber board seats.

Accusing Kalanick of being “selfish” by packing Uber’s board with “loyal allies,” Benchmark alleges that the ousted CEO broke the law by trying to pave the way.

The board of directors and corporate managers work together and at times, because they know each other well, there could be an entrenchment among them. As the alleged claim is true CEO Travis Kalanick committed fraud, breach of contract and breach of fiduciary duty to benefit himself, what kind of problem in a corporation describes the situation the best?

1. managers benefiting themselves rather than the shareholders of the company is called “fiduciary problem.”

2. managers benefiting the shareholders of the company rather than themselves is called “corporate governance.”

3. managers benefiting the shareholders of the company rather than themselves is called “agency problem.”

4. none of the answers is correct.

5. managers benefiting themselves rather than the shareholders of the company is called “agency problem.”

Pomerantz LLP is investigating claims on behalf of investors of EQT Corporation (“EQT” or the “Company”). The investigation concerns whether EQT and certain of its officers and/or directors have engaged in securities fraud or other unlawful business practices.
On June 19, 2017, EQT announced entry into an agreement to acquire Rice Energy Inc. (“Rice”) for total consideration of $6.7 billion (the “Acquisition”). EQT touted the purported benefits of the proposed merger, telling its shareholders that the Acquisition would result in $2.5 billion in synergies, including $100 million in cost savings in 2018 alone. On July 3, 2017, activist investor JANA Partners LLC (“JANA”), in several letters citing detailed evidence, asserted that the Rice merger synergies were “grossly exaggerated” and that according to JANA’s expert analysis, “it would be impossible for EQT to support its claimed synergy drilling plan.” Nonetheless, EQT repeatedly denied JANA’s assertions and reassured investors of the merits of the Acquisition. EQT and Rice shareholders thereafter approved the Acquisition. After the Acquisition closed in November 2017, EQT continued to tout the “significant operational synergies” or the merger that would purportedly allow EQT to become “one of the lowest-cost operators in the United States.” On March 15, 2018, just five months after the Acquisition closed, EQT announced the sudden and unexpected resignation of Steven T. Schlotterbeck as the Company’s Chief Executive Officer. Then, on October 25, 2018, EQT reported surprisingly bad third-quarter financial results caused by a significant increase in total costs, which were $586.2 million higher than in the same period of the prior year. Moreover, EQT disclosed that its estimated capital expenditures for well development in 2018 would increase by $300 million, to $2.5 billion, as a result of “inefficiencies from higher activity levels, the learning curve on ultra-long horizontal wells, and service cost increases.” As a result, EQT reduced its full-year forecast for 2018. These disclosures were at odds with EQT’s prior representations concerning the purported synergies of the Acquisition.
On this news, EQT’s stock price fell $2.79 per share, or 12.65%, to close at $19.24 per share on October 25, 2018.

Which one of the goals will be appropriate for Steven T. Schlotterbeck as the Company’s Chief Executive Officer to follow?

1. Shareholders wealth maximization.

2. Short-term profit maximization.

3. Sales and net income maximization.

4. Free cash flow maximization.

5. none of the answers is correct.

When Ultra Petroleum Corp. emerges from bankruptcy protection in the coming weeks, as expected, the natural gas producer's chief executive is on track to be rewarded with roughly $35 million worth of its stock, more than 10 times his annual compensation in recent years.

Michael Watford, the CEO, and other employees at the Houston company are sharing 7.5% of the Ultra's new shares, a fairly typical cut awarded to managers of companies emerging from bankruptcy protection to incentivize them to stick around. Bankrupt companies usually issue new stock when they emerge from bankruptcy, replacing their old shares.

What's unusual in Ultra's case is the size of the pie from which that slice is coming: The company's postbankruptcy equity value has been set at about $4 billion, meaning that its employees are due some $300 million of stock, 40% of it to be doled out the day its new shares are launched, according to court filings and people familiar with the matter. The rest would be distributed at the discretion of its board.

While Ultra Petroleum Corp. emerges from bankruptcy protection, Michael Watford, the CEO of the company, will be rewarded with roughly $35 million worth of its stock. Do you think this is consistent with the firm’s goal?

1. The amount of the award is outrageous, and it is inconsistent with the sales maximization goal.

2. none of the answers is correct.
3. There's more to Uber IPO flop than meets the eye: It’s clear now that Uber Technologies Inc’s initial public offering will be left with a less than five-star review. The stock remains below its IPO price, and many people have heaped fault on the bankers who told executives that Uber could be worth $120 billion.

4. Even though the amount awarded is outrageous, the incentivizing top managers with bonuses is consistent with the shareholders wealth maximization goal.

5. Even though the amount awarded is outrages, the incentivizing top managers with bonuses is consistent with the shareholders sales maximization goal.

6. The amount of the award is outrageous, and it is inconsistent with the shareholders wealth maximization goal.

Case:

Forty years ago, Starbucks was a single store in Seattle’s Pike Place Market selling premium roasted coffee. Today, it is a global roaster and retailer of coffee with some 21,536 stores, 43 percent of which are in 63 countries outside the United States. China (1,716 stores), Canada (1,330 stores),

Japan (1,079 stores), and the United Kingdom (808 stores) are large markets internationally for Starbucks. Starbucks set out on its current course in the 1980s when the company’s director of marketing, Howard Schultz, came back from a trip to Italy enchanted with the Italian coffeehouse experience. Schultz, who later became CEO, persuaded the company’s owners to experiment with the coffeehouse format—and the Starbucks experience was born. The strategy was to sell the company’s own premium roasted coffee and freshly brewed espressostyle coffee beverages, along with a variety of pastries, coffee accessories, teas, and other products, in a tastefully designed coffeehouse setting. From the outset, the company focused on selling “a third place experience,” rather than just the coffee. The formula led to spectacular success in the United States, where Starbucks went from obscurity to one of the best-known brands in the country in a decade. Thanks to Starbucks, coffee stores became places for relaxation, chatting with friends, reading the newspaper, holding business meetings, or (more recently) browsing the web. In 1995, with 700 stores across the United States, Starbucks began exploring foreign market opportunities. The first target market was Japan. The company established a joint venture with a local retailer, Sazaby Inc. Each company held a 50 percent stake in the venture, Starbucks Coffee of Japan. Starbucks initially invested $10 million in this venture, its first foreign direct investment. The Starbucks format was then licensed to the venture, which was charged with taking over responsibility for growing Starbucks’ presence in Japan.

To make sure the Japanese operations replicated the “Starbucks experience” in North America, Starbucks transferred some employees to the Japanese operation. The licensing agreement required all Japanese store managers and employees to attend training classes similar to those given to U.S. employees. The agreement also required that stores adhere to the design parameters established in the United States. In 2001, the company introduced a stock option plan for all Japanese employees, making it the first company in Japan to do so. Skeptics doubted that Starbucks would be able to replicate its North American success overseas, but by June 2015, Starbucks had some 1,079 stores and a profitable business in Japan. After Japan, the company embarked on an aggressive foreign investment program. In 1998, it purchased Seattle Coffee, a British coffee chain with 60 retail stores, for $84 million. An American couple originally from Seattle had started Seattle Coffee with the intention of establishing a Starbucks-like chain in Britain. In the late 1990s, Starbucks opened stores in Taiwan, Singapore, Thailand, New Zealand, South Korea, Malaysia, and—most significantly— China. In Asia, Starbucks’ most common strategy was to license its format to a local operator in return for initial licensing fees and royalties on store revenues. As in Japan, Starbucks insisted on an intensive employee-training program and strict specifications regarding the format and layout of the store. By 2002, Starbucks was pursuing an aggressive expansion in mainland Europe. As its first entry point, Starbucks chose Switzerland. Drawing on its experience in Asia, the company entered into a joint venture with a Swiss company, Bon Appetit Group, Switzerland’s largest food service company. Bon Appetit was to hold a majority stake in the venture, and Starbucks would license its format to the Swiss company using a similar agreement to those it had used successfully in Asia. This was followed by a joint venture in other countries. The United Kingdom leads the charge in Europe with 808 Starbucks stores. By 2014, Starbucks emphasized the rapid growth of its operations in China, where it had 1,716 stores and planned to roll out another 500 in three years. The success of Starbucks in China has been attributed to a smart partnering strategy. China is not one homogeneous market; the culture of northern China is very different from that of the east, and consumer spending power inland is not on par with that of the big coastal cities. To deal with this complexity, Starbucks entered into three different joint ventures: in the north with Beijong Mei Da coffee, in the east with Taiwan-based UniPresident, and in the south with Hong Kong-based Maxim’s Caterers. Each partner brought different strengths and local expertise that helped the company gain insights into the tastes and preferences of local Chinese customers, and to adapt accordingly. Starbucks now believes that China will become its second-largest market after the United States by 2020.

Question:

2. Many would argue that Starbucks coffee is expensive, and yet customers get “value” for their money. How do you think Starbucks has been able to transfer this business model and value proposition to international markets?

Case:

Forty years ago, Starbucks was a single store in Seattle’s Pike Place Market selling premium roasted coffee. Today, it is a global roaster and retailer of coffee with some 21,536 stores, 43 percent of which are in 63 countries outside the United States. China (1,716 stores), Canada (1,330 stores),

Japan (1,079 stores), and the United Kingdom (808 stores) are large markets internationally for Starbucks. Starbucks set out on its current course in the 1980s when the company’s director of marketing, Howard Schultz, came back from a trip to Italy enchanted with the Italian coffeehouse experience. Schultz, who later became CEO, persuaded the company’s owners to experiment with the coffeehouse format—and the Starbucks experience was born. The strategy was to sell the company’s own premium roasted coffee and freshly brewed espressostyle coffee beverages, along with a variety of pastries, coffee accessories, teas, and other products, in a tastefully designed coffeehouse setting. From the outset, the company focused on selling “a third place experience,” rather than just the coffee. The formula led to spectacular success in the United States, where Starbucks went from obscurity to one of the best-known brands in the country in a decade. Thanks to Starbucks, coffee stores became places for relaxation, chatting with friends, reading the newspaper, holding business meetings, or (more recently) browsing the web. In 1995, with 700 stores across the United States, Starbucks began exploring foreign market opportunities. The first target market was Japan. The company established a joint venture with a local retailer, Sazaby Inc. Each company held a 50 percent stake in the venture, Starbucks Coffee of Japan. Starbucks initially invested $10 million in this venture, its first foreign direct investment. The Starbucks format was then licensed to the venture, which was charged with taking over responsibility for growing Starbucks’ presence in Japan.

To make sure the Japanese operations replicated the “Starbucks experience” in North America, Starbucks transferred some employees to the Japanese operation. The licensing agreement required all Japanese store managers and employees to attend training classes similar to those given to U.S. employees. The agreement also required that stores adhere to the design parameters established in the United States. In 2001, the company introduced a stock option plan for all Japanese employees, making it the first company in Japan to do so. Skeptics doubted that Starbucks would be able to replicate its North American success overseas, but by June 2015, Starbucks had some 1,079 stores and a profitable business in Japan. After Japan, the company embarked on an aggressive foreign investment program. In 1998, it purchased Seattle Coffee, a British coffee chain with 60 retail stores, for $84 million. An American couple originally from Seattle had started Seattle Coffee with the intention of establishing a Starbucks-like chain in Britain. In the late 1990s, Starbucks opened stores in Taiwan, Singapore, Thailand, New Zealand, South Korea, Malaysia, and—most significantly— China. In Asia, Starbucks’ most common strategy was to license its format to a local operator in return for initial licensing fees and royalties on store revenues. As in Japan, Starbucks insisted on an intensive employee-training program and strict specifications regarding the format and layout of the store. By 2002, Starbucks was pursuing an aggressive expansion in mainland Europe. As its first entry point, Starbucks chose Switzerland. Drawing on its experience in Asia, the company entered into a joint venture with a Swiss company, Bon Appetit Group, Switzerland’s largest food service company. Bon Appetit was to hold a majority stake in the venture, and Starbucks would license its format to the Swiss company using a similar agreement to those it had used successfully in Asia. This was followed by a joint venture in other countries. The United Kingdom leads the charge in Europe with 808 Starbucks stores. By 2014, Starbucks emphasized the rapid growth of its operations in China, where it had 1,716 stores and planned to roll out another 500 in three years. The success of Starbucks in China has been attributed to a smart partnering strategy. China is not one homogeneous market; the culture of northern China is very different from that of the east, and consumer spending power inland is not on par with that of the big coastal cities. To deal with this complexity, Starbucks entered into three different joint ventures: in the north with Beijong Mei Da coffee, in the east with Taiwan-based UniPresident, and in the south with Hong Kong-based Maxim’s Caterers. Each partner brought different strengths and local expertise that helped the company gain insights into the tastes and preferences of local Chinese customers, and to adapt accordingly. Starbucks now believes that China will become its second-largest market after the United States by 2020.

Question:

1. Starbucks prefers a combination approach to foreign market entry: the use of joint ventures and licensing. Do you agree with this approach? Why or why not?

Problem 1

On 1/1/20x1, Petwoud Company acquired 100% of the $1 par value outstanding voting common stock of Supagud, Inc. for a cash payment of $600,000. At the acquisition date, the fair value of Petwoud Company’s common stock was $20 per share. Below is the summary balance sheet information of Supagud, Inc. at acquisition (1/1/20x1):

During fiscal year-ending 12/31/20x1 and 12/31/20x2, Supagud, Inc. generated net income and paid dividends as follows:

As of 1/1/20x1, Supagud's land had a fair value of $102,000, its buildings were valued at $188,000, and its equipment was appraised at $216,000. According to Petwoud Company’s analysis, they will record any excess of consideration paid over fair value of assets and liabilities acquired as a Patent asset to be amortized over 6 years.

Required

1. Using the acquisition method and assuming that Petwoud dissolves Supagud, Inc. so it is no longer in business, prepare Petwoud Company’s journal entry to record the acquisition of Supagud, Inc. at 1/1/20x1.

For B. and C. below, assume Supagud remains in business as a separate operating company and that, for internal accounting purposes, Petwoud accounts for their investment in Supagud, Inc. using the equity method:

2. Prepare Petwoud Company’s journal entry to record the acquisition of Supagud, Inc. at 1/1/20x1.
3. Prepare Petwoud Company’s worksheet consolidation journal entries for:
   1. December 31, 20x1 and
   2. December 31, 20x2.

Consider the following table for a period of six years: Returns Year Large-Company Stocks U.S. Treasury Bills 1 –15.69 % 7.49 % 2 –26.77 8.09 3 37.43 6.07 4 24.13 6.07 5 –7.56 5.55 6 6.77 7.94 Calculate the arithmetic average returns for large-company stocks and T-bills over this time period. Arithmetic average returns Large-company stock % T-bills % Calculate the standard deviation of the returns for large-company stocks and T-bills over this time period. Standard deviation Large-company stock % T-bills % Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. a. What was the arithmetic average risk premium over this period? (A negative answer should be indicated by a minus sign. Average risk premium % b. What was the standard deviation of the risk premium over this period? Risk premium standard deviation %

Which of the following statements is correct for a U.S. importing firm that owes GBP 1,000,000 payable in three months? Assume the company's WACC is 12% p.a. and the U.K. deposit rates are 8% p.a. The current spot rate is USD1.45/GBP and the 3-month forward rate is USD1.50/GBP.

Sako Company’s Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker follow:

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of $97 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

Required:

1. Assume the Audio Division sells only 20,000 speakers per year to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?


2. Assume the Audio Division is selling 22,500 speakers per year to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

3. Assume the Audio Division is selling 25,000 speakers per year to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

Sako Company’s Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker follow:

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of $117 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

Required:

1. Assume the Audio Division sells only 20,000 speakers per year to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?


2. Assume the Audio Division is selling 22,500 speakers per year to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

3. Assume the Audio Division is selling 25,000 speakers per year to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

Sako Company’s Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker follow:

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of $125 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

Required:

1. Assume the Audio Division sells only 20,000 speakers per year to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?


2. Assume the Audio Division is selling 22,500 speakers per year to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

3. Assume the Audio Division is selling 25,000 speakers per year to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

Discussion Questions

1. Using the common motives for cross-border deals discussed in this chapter, speculate as to the reasons Actavis acquired Forest Labs.

2. What alternatives to acquisition could Actavis have pursued? Speculate as to why a takeover was the preferred option?

3. Speculate as to how Actavis’s takeover of Forest Labs may have created shareholder value?

4. Do you believe firms should be allowed to engage in tax inversions?

5. Why is Actavis organized as a holding company in Ireland?

6. Speculate as to why investors for both firms responded so favorably when news of the deal was announced?

END OF CHAPTER CASE STUDY: IRELAND-BASED DRUG MAKER ACTAVIS BUYS U.S. PHARMACEUTICALS FIRM FOREST LABS

Case Study Objectives: To Illustrate • Alternative motives for cross-border acquisitions • How taxes impact cross-border deals and capital flows • How activist investors can impact corporate decisions.

Reflecting the escalating costs of developing blockbuster drugs (i.e., those with the potential to deliver more than $1 billion in annual revenue) and the loss of patent protection on many substantial revenue producing medications, the pharmaceutical industry has been undergoing a wave of consolidation for more than a decade. The takeover strategy in many instances appeared to be largely formulaic: acquire rivals, slash costs, and minimize taxes. While Valeant Pharmaceuticals and Endo Health Solutions have employed this strategy effectively, drug maker Actavis is perhaps the most successful, tripling its market value during the last 3 years. Actavis is a global, integrated specialty pharmaceutical company focused on developing, manufacturing, and distributing generic and branded products in more than 60 countries. Structured as a holding company, its global headquarters is located in Dublin, Ireland. The firm’s US administrative headquarters is in Parsippany, NJ. Actavis historically has focused on generic drugs, but in recent years it has expanded through acquisition into branded drugs. Actavis on February 18, 2014, announced that it had reached an agreement to buy Forest Laboratories for $25 billion in cash and stock to create a pharmaceuticals firm with substantial exposure to branded and generic drugs. Forest Labs is a fully integrated specialty pharmaceutical firm focused on the US market, with a portfolio of branded products. The combined revenues of the two specialty pharmaceutical companies are expected to be more than $15 billion in 2015. The new company announced that it would be increasing its annual budget for pharmaceutical research and development to more than $1 billion. Strategically, Forest Labs represented an opportunity for Actavis to diversify into branded drugs and for Forest Labs to penetrate foreign markets not currently survived. Forest Labs also has an impressive number of drugs in the pipeline. In 2012, US-based Watson Pharmaceuticals bought Actavis, then headquartered in Switzerland, for nearly $6 billion and adopted its name. In 2013, the firm bought Irish-based Warner Chilcott for about $5 billion expanding its presence in specialty pharmaceuticals and moved its headquarters to Ireland to take advantage of the country’s favorable corporate tax environment. The takeover of Forest Labs needed an assist from famed activist investor Carl Icahn. Icahn has a track record of investing in drug makers and profiting from their turnarounds or sales to larger companies. His previous investments included ImClone Systems which was sold to Eli Lilly & Co. in 2008 for $6.3 billion and in Genzyme Corp which was sold to Sanofi in 2011 for $19.4 billion. In 2012, Icahn investments that were later sold included Amylin Pharmaceuticals which was acquired by Bristol-Myers Squibb for $5.1 billion. Icahn, who owns 11% of Forest’s stock through his firm Icahn Enterprises, played a key role in making this deal happen by prodding Forest Labs to install a new CEO in 2013 who was more amenable to selling the firm. To avoid a third proxy fight in as many years, Forest added an Icahn representative to its board in 2013 increasing his influence on board decisions. Under the terms of the deal, Forest shareholders will receive $26.04 in cash and 0.3306 of a share of Actavis, equivalent to $89.48 per share. This represents a premium of 25% from Forest Lab’s closing price the prior day. Forest shareholders will own 35% of the combined firms. Forest Labs agreed to pay a termination fee of $875 million if it backs out of the agreement in favor of a competing takeover proposal or if the firm’s shareholders do not approve the deal. The acquisitive Actavis has completed seven deals since January 2013. Like those deals, the firm expects to realize substantial costs savings. However, in this case, the takeover of Forest Labs will be accretive to earnings immediately following closing. This is relatively unusual as cost savings in most deals in the first year are negated by a combination of severance expenses and other integration-related costs. Actavis announced that it expects to realize a combination of operating and tax savings of $1 billion annually to be realized beginning in the first full year of operation of the combined firms. Assuming a discount rate of 12%, the present value of these savings in perpetuity is $8.3 billion ($1 billion/0.12), well in excess of the $5 billion acquisition premium paid for Forest Labs. Not surprisingly, investors greeted news of the merger favorably. Shares of Forest rose 30% and those of Actavis were up 12%. The takeover of Warner Chilcott in 2012 allowed Actavis to complete a “tax inversion” in which it relocated its headquarters to Ireland to escape the higher American statutory corporate tax rate. A big advantage of a “tax inversion” besides the lower statutory tax rate is that acquisitions become more affordable. Cash held overseas because of the more favorable tax rates can be used to pay for a deal and the earnings from the acquired firm are also taxed at Actavis’s lower tax rate. Tax inversions are not viewed as tax evasion strategies by the US taxing authorities as long as they can be justified by good business reasons such as getting nearer to a firm’s customers or suppliers. Tax evasion is the avoidance of taxes through illegal means such as misrepresenting income on a tax return. The maximum corporate tax rate in Ireland is 12.5% compared to 35% in the United States. Forest Labs earnings which had been taxed at the higher US rate will be taxed at the lower Irish rate currently paid by Actavis. Annual tax savings are expected to amount to at least $100 million. This gave Actavis a huge advantage in bidding for Forest Labs over other potential suitors by enabling it to offer a larger premium. From a legal perspective, an inversion is simply the process by which a corporate entity, established in another country, “buys” an established American company. The transaction takes place when the overseas entity purchases either the shares or assets of a domestic corporation. The shareholders of the domestic company typically become shareholders of the new foreign parent company. In essence, the legal location of the company changes through a corporate inversion from the United States to another country. An inversion typically does not change the operational structure or location of a company. In most cases, an inversion simply means the addition of a small office in the company’s new foreign “home.” Therefore, a re-incorporation rarely, if ever, leads to the loss of American jobs. However, it does lead to a loss of tax revenue.